Loren Steffy: Why banks fear Elizabeth Warren

Why the big, bad banks are afraid

LOREN STEFFY, HOUSTON CHRONICLE

Published 5:30 am, Monday, May 30, 2011

The big banks are tough.

They can handle Dodd-Frank. They can handle being labeled a "vampire squid" in the pages of Rolling Stone. They can even outlast the threat of criminal prosecutions for taking the global economy to the brink of collapse.

But what scares them the most is Elizabeth Warren, a Harvard law professor who has spent years learning their secrets.

Last week, the banks' representatives in Congress grilled Warren over the Consumer Financial Protection Bureau, a panel created in response to the financial crisis that might just give consumers a fighting chance against banks' exorbitant fees, debt spiral schemes and outright fraudulent lending practices.

The CFPB is designed to promote consumer understanding of financial products by promoting transparency among financial institutions. Republicans have vowed to water down the bureau's powers.

Warren is a veteran of contentious congressional hearings, most recently ones she conducted as head of the oversight panel for the federal bank bailout. During those sessions, she squared off with Treasury Secretary Timothy Geithner over the government's handling of bailout funds and its claims that banks' balance sheets are sound.

Growing desperation

So last week, when Warren didn't crumble under his badgering, Rep. Patrick McHenry, a Republican from Bank of America's home state of North Carolina, decided to try to humiliate her. Knowing she had scheduling conflicts that had already been discussed with committee staffers, he tried to delay the hearing and when she protested, he basically called her a liar.

The lack of decorum speaks to the desperation that the big banks feel over Warren and the CFPB, an agency that she is helping to establish and that would have broad powers to act on consumers' behalf.

"The discretion that the CFPB has is extraordinary," Larry Young, a Houston attorney and expert on consumer finance law, told me recently.

Fees and other gimmicks now account for a greater slice of big bank profits, and the CFPB poses a real threat to banks' bottom line.

Not nominated

In recent years, Warren has found herself at odds with both the administration and Republicans over her criticism of banks' practices and their financial soundness. Republicans have threatened to block her appointment to lead the agency, which is part of the reason that President Barack Obama hasn't nominated her for the job of running the CFPB.

A University of Houston graduate and former University of Texas law professor, Warren warned in books and scholarly papers for a decade before the financial crisis that the lending practices of the big banks spelled economic doom. She drew that conclusion after scouring decades worth of federal reports on household spending in the 1990s as part of a sweeping research project to explain the rise in personal bankruptcies.

Warren began the project assuming that the cause was wanton spending — consumers had simply grown irresponsible, taking on debt they couldn't repay, she told author and filmmaker James Scurlock in his documentary Maxed Out.

Banks blamed

After analyzing the data, she reached a far different conclusion: Banks are willing to bankrupt their customers for short-term profit.

She found onerous fees, indecipherable credit card agreements and programs such as "overdraft protection" that were touted as consumer benefits but that were really designed to make money by driving customers further in debt. She found banks embracing practices such as subprime lending that turned borrowers banks would have never lent to before into profit centers of inescapable leverage.

In 2006, two years before the collapse of Lehman Brothers, she warned that banks' attitudes had shifted so dramatically in the past 80 years that the greatest threat to the economy wasn't customers making runs on banks, but banks making "a run on the customers."

Ruining customers through excessive fees and gimmicks, driving them into foreclosure, default and bankruptcy, would lead to the same economic collapse that bank runs did during the Great Depression, she warned.

In the know

In other words, the banks fear Warren because she knows their games and she has the data to expose them, and the prospect of Warren running the CFPB has fostered a growing desperation in the industry.

Last week, bereft of other arguments, the congressman from Bank of America resorted to name calling.

Elizabeth Warren isn't a liar. She's one of the few people in Washington with the courage to tell the truth.